Are You Managing Your Interest Rate Risk Accurately?

Are You Managing Your Interest Rate Risk Accurately?

Over the last twenty years, as interest rates have fallen, so too has the profitability of financial institutions. Many financial institutions use inferior analytics such as GAP reports (re-pricing assets minus re-pricing liabilities in various time periods such as 3-mo or 1-yr.) to analyze risk and run the risk of inaccurate risk management.

Uncertainty Leads to Frozen Decisions

More sophisticated financial institutions generally have an idea of their risk profile as they are able to hire analysts and purchase software but they still have a level of uncertainty concerning the interest rate risk hidden within their balance sheet. Paralysis by analysis arises due to the lack of confidence. Entering into interest rate hedges is a daunting undertaking for most, due to the potential for significant off balance sheet losses. There is therefore a tendency to analyze the numbers to exhaustion to ensure correctness. Paralysis by analysis results in inaction where interest rate risk management strategies are either delayed or not implemented at all.

You could Get Yourself Fired

Government regulations require that all financial institutions measure the interest rate risk associated with the cash flows of their assets and liabilities. Regulatory compliance is therefore extremely important to financial institutions and becoming much more demanding under Basel III. Financial institutions not meeting regulatory requirements come under close scrutiny and possible supervision. Senior management may also be replaced, as regulatory issues are generally elevated to the Board of Directors.

Mitigate Risk, Add Value and Earn Higher Returns

Tuff Risk offers full service risk management consulting services that determine the precise risk profile of the financial institution, identifying all areas of risk and engineering risk management strategies designed to mitigate risk that have earned our clients millions of dollars. Tuff Risk designs, models and recommends risk management strategies, with a focus on the impact these strategies have on the profitability of the client. Although the return to each client varies, depending on the client’s specific risk profile, Tuff Risk can add value to any balance sheet.

Replace Your Risk Management Department at a Fraction of the Cost

Tuff Risk offers access to a team of MBA’s, CPA’s and CFA’s that have specialized in interest rate risk management for decades, working with banks, trust companies and credit unions throughout North America. Tuff Risk, as well as forty-seven of the largest 50 financial corporations in the world, uses Sungard software, the software of choice of several large US and Canadian banks. Tuff Risk clients do not have to worry whether their interest rate risk is being managed properly, as Tuff Risk undertakes in-depth risk analyses on their behalf and delivers a detailed assessment of the interest rate risk found within their balance sheet.

Timely Reporting, Decisive Risk Management Strategies, Greater Profitability

Experience breeds confidence and Tuff Risk has a lot of experience measuring interest rate risk and designing risk management strategies. Tuff Risk delivers both short and long-term risk measures, as well as product and financial derivative risk management strategies within 10 days of receiving data. Each Tuff Risk ALM report is followed up with an in-depth discussion as to the inherent risks of the balance sheet and the various strategies available to the client. Tuff Risk clients know their precise risk profile and have proven strategies to manage unwanted risk.

Tuff Risk Focus

Tuff Risk analyzes a financial institution’s balance with the primary goal of determining the precise source of interest rate risk. Once identified, the focus is quickly shifted to

  • safeguarding current and future earnings, and then
  • restructuring the balance sheet to maximize profit in today’s interest rate environment.

Laissez-faire attitudes with respect to safeguarding profits and designing forward looking risk management strategies are non-acceptable to Tuff Risk clients. Those looking to merely to meet regulatory reporting requirements should definitely look to another Asset Liability Management firm.

Tuff Risk focuses on three key facets of interest rate risk management:

1. The Short-term Perspective Managing the risk to the financial margin over the next 12-months, given today’s interest rate environment.
2. The Long-term Perspective Managing the risk to future profitability, by strategically restructuring the balance sheet to take advantage of today’s economic environment.
3. Profit & Risk Strategies Both product and derivative strategies are used to safeguard and to enhance earnings. It is imperative that today’s balance sheet is in concert with tomorrow’s interest rate environment.

The tools and methodologies used by Tuff Risk in analyzing and measuring clients’ interest rate risk profiles are among the most sophisticated available. Add experience and confidence and Tuff Risk delivers the insight that no other firm can provide.